W H Smith - 7% yield + modest capital appreciation = 25% within a year

WH Smith issues profit warning after weak christmas
By Lisa Urquhart in London
Published: January 2 2004 8:41 | Last Updated: January 2 2004 10:37


WH Smith on Friday warned on profits following disappointing sales over the Christmas period, and said Beverley Hodson, managing director of UK retail, would be stepping down immediately.


The UK high street retailer, which took the decision to bring forward its Christmas trading statement because of the poor sales, said this and pressure on margins would result in a material shortfall in profits against current expectations.

In early trading WH Smith shares fell more than 21 percent, although they later recovered slightly to trade down just under 14 per cent at 238p.

In the 17 weeks to December 27 WH Smith revealed flat like-for-like sales across the group, with gross margins down 2 percentage points, as the group increased its promotional activity to drive sales.

But the increase in volumes, particularly in the highly competitive entertainment category, which includes CDs, books and DVDs, failed to offset the fall in gross margins.

There had been speculation during December that the group might be among a number of retailers issuing profits warnings after Christmas following poor sales in the run up the the Christmas period.

In the 17 week period WH Smith high street reported flat like-for-like sales, with like-for-likes at WH Smith travel retail up 3 per cent. WH Smith online reported like-for-like sales of 3 per cent.

Organic sales in the key product categories were also mixed. Like-for-like sales of books were up 2 per cent but stationery sales fell by 2 per cent and, while news and express was up 3 per cent, like-for-like entertainment sales were down 3 per cent.


Hodson pays the price of Christmas failure


Beverley Hodson paid the price for a disappointing Christmas at WH Smith. Her exit as managing director of UK retail brings to an abrupt end a career with the company that began six years ago with high hopes of a turnround.
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Louise Evans, media relations manager, said as well as the increased competition from other retailer, that some of the blame could be laid at the door of the group's promotional activity. "It did lack clarity and at times confused the customer," she said.

Ms Evans also said that too many products had also been skewed towards the premium end at the expense of the group's core products.

Availability problems, which had resulted in some popular products selling out and the introduction of non-core gift items were also listed as reasons for the poor sales.

Kate Swan, chief executive, who is taking operational control of UK retail following Ms Hodson's departure said: "These are, by any standard, disappointing results reflecting tough conditions in the UK high street".

She added that her immediate focus would be be to improve performance by strengthening the senior management team and undertaking a detailed operational and financial review of the business.

Hinting a further job cuts Ms Swan said that she had commissioned an review of the group's head offices in Swindon and London with a view to streamline key processes and "delivering a material reduction in the cost base".

WH Smith has 1,200 staff working at the two offices.

The weak sales are now expected to trigger heavy discounting at the group, which will further impact operating profits as WH Smith tries to clear surplus stock.

Additionally the group announced a full operational and financial review of the business, which will result in more stock clearance and write-downs.

WH Smith, which declined to put a figure to the possible loss from discounting, said the write-down on assets would be taken as an exceptional operating charge in the this year.

WH Smith also reported that its underlying costs had risen by 4 per cent, on top of marketing cost that were up by £3m in the year.

Richard Ratner of Seymour Pierce said: “What has emerged can only be seen as disastrous.” He added that given the group’s dependence on Christmas, he had now downgraded full year forecasts from £108m to £68m.

He also said the group might also cut its dividend given the results and its stated aim of increasing dividend cover to 2 times.